Shop Management | Operations - Collision Repair

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Finding ways to boost profits by reducing costs (without cutting quality)

Many shop owners and estimators fail to educate themselves about the tools and techniques that will help them develop more accurate and complete estimates. Don't fall into this trap.
Sunday, July 1, 2007 - 00:00

Many shop owners and estimators fail to educate themselves about the tools and techniques that will help them develop more accurate and complete estimates. Don't fall into this trap.

There's a simple rule in business that if you want to increase profits you need to either increase sales and revenue, or decrease costs and expenses. If you want to work on the expense side of that equation by reducing your costs of doing business, one key is to start to measure those costs as a percentage of revenue. Run that calculation using your past three or four annual financial statements. If that percentage has changed from year to year, one thing will be clear: If you can decrease that percentage, your profit increases, even if your revenues aren't growing.

Once you have established what your costs have been in the past as a percentage of sales, you can turn your attention to making sure that percentage starts to go down. Here are some ways shops have found to do that – without sacrificing quality.

Reign in insurance costs

No doubt about it: Insurers are masters at "cost-containment." But as a purchaser of insurance, your business can turn the tables by making sure you're not spending more on insurance than you should.

Take your workers' compensation insurance, for example. You or your insurance broker should make sure your employees are properly classified because the premium for technicians is often five or seven times the rate for office employees.

And because your premiums are based in part on payroll, a slowdown in work that has significantly reduced your payroll may make it worth going back to the insurance carrier to see if your premiums can be adjusted to reflect the decreased payroll.

As with all insurance, your workers' comp rates are also based on your claims history, so making efforts to reduce workplace injuries will help you reduce costs. Ask your insurance broker or workers' comp carrier to conduct a free safety audit of your shop. They'll point out things that could lead to claims and higher premiums.

Employers can also reduce workers' comp costs by reducing the expense of injuries when they occur. Some states, for example, allow you to designate a clinic where all employee injuries are handled. Get an injured employee back to work – even if on light-duty handling paperwork – as quickly as they are medically able. And if you suspect fraud, push the insurance carrier to investigate.

Double-digit annual increases in medical insurance make providing health coverage for employees among the fastest-growing expenses for most businesses. Most companies have already taken the traditional steps to dealing with this: raising their deductibles and requiring employees to pay an increasing portion of the premiums.

One of the newer ways to possibly reduce health coverage costs are health savings accounts (HSAs). Such plans can be less expensive because they have a high deductible. Under the plan, however, the company and its workers can put pre-tax money into savings accounts that can grow over time or be used to cover health care expenses. HSAs may be more appealing to some company owners and employers (particularly those who are younger, healthier or more highly-compensated) than it is for others, but some health insurance providers may even allow you to offer employees a choice of either an HSA or a traditional plan.

In any case, shop owners should get a two- or three-year history of their health insurance claims. The insurer cannot provide specific health care costs or treatments by employee, but they can provide a summary that shows, for example, the total amount paid under the plan for doctor's visits, hospital care or prescription drugs for your company's employees in a given year. Comparing this amount to your premiums can give you an indication what kind of value you're getting for your premiums.

Business property and liability premiums also tend to be cyclical, so it may pay to shop around, particularly among the five or six carriers who specialize in business insurance for the automotive repair industry.

And check how your buildings are rated. Virtually every commercial building in the country is rated by the ISO (Insurance Service Office) based on the building's distance from a fire hydrant and fire station, the type of construction, the age of the building, the types of buildings that surround it, etc. Ask your agent to get a copy of this rating and to review it with you. If the rating was done 10 years ago and changes have been made to your building or surrounding properties, you may want to have your building re-rated.

Outsource and audit

But insurance is just one area shops can look at when working to reduce costs. Payroll outsourcing has become an increasingly competitive service, so if it's been several years since you considered turning payroll over to an outside firm – or shopped around to make sure your payroll service provider is still competitive – this may be a good time to do so.

"I like Costco and we now do our payroll through them," says Katie Gallegos, co-owner of Russo's Collision Repair in Watsonville, Calif. "It works well for us and helps us keep our bottom line where it's supposed to be. I've actually just been shopping for insurance for our employees through Costco as well."

With fax lines, high-speed Internet, cell phones and other telecommunication expenses becoming more complex, shops may find it worthwhile to more closely audit their phone company and related bills. Some studies have found a high percentage of such bills contain errors and that many companies are paying incorrect fees or taxes to telecommunication providers. While you can certainly audit these bills yourself, it may be another service you want to outsource.

Type "telecommunications audit" into an Internet search engine, and you'll find dozens of listings for firms that will audit your telecommunications bills on a one-time or ongoing basis. Many of these firms say they regularly find savings of 10 percent to 20 percent for businesses, and some charge no fee, instead taking a percentage of the savings they find.

Cutting into utility costs

There are a number of other ways to reduce your overall utility bills. You've probably heard that lowering your thermostat one degree can cut your heating bill by as much as 20 percent. And a programmable thermostat can help ensure the temperature in the shop stays where it should to save money both during the day and at night.

Dick Guthrie, owner of J & D Auto Body with California shops in Lodi and Galt, says it's worth looking at also lowering the bake time on the paint booth drying cycle. He suggests adding timers on restroom lights and fans to prevent them from running unnecessarily. And train employees to turn off the vacuum system and paint booth lights when they're not needed.

"Yeah, it's not all that much money, but if you consider everything like that as profit leaking out, you can find a lot of ways to save money," Guthrie says. "Those nickels and dimes add up to dollars."

It can also pay to find and fix compressed air leaks promptly to reduce the amount of time the air compressor runs. Even just providing all of your technicians with garage door openers can reduce the amount of time that overhead doors are open – and letting heat in or out.

Many utility companies will conduct audits for businesses, coming through the shop to offer suggestions of ways to reduce energy use. They also can help shops find out about tax rebates or other subsidies that may be available, for example, to cover all or some of the cost to install more efficient lighting systems – which then offer cost savings of their own.

Garbage and hazardous waste hauling can be other large expenses for body shops. Jamon Ellingson, manager of Auto Art Body & Paint in Cottage Grove, Ore., said a recently-purchased paper compactor and paint waste recycler are helping his company save money.

"We were always maxing out our dumpster, so the compactor is saving us on our garbage bill," Ellingson says. "And the solvent waste recycler has been great. We were teetering on the edge of being designated (by the state environmental regulatory agency) a 'small quantity hazardous waste generator' and we wanted to reduce our hazardous waste to maintain our 'exempt' status. So that's worked out great."

Reducing your tax liability

If you're in a jurisdiction in which companies must pay personal property tax, make sure you get rid of any equipment or tools that aren't being used and that you've taken anything you no longer have off the tax rolls.

And if you think your newly assessed property tax is out-of-line, it may be worth challenging the assessment yourself – or hiring one company to handle the challenge for you. If you outsource this aspect of your business, work with a local company that knows the market better than some of the national assessment-challenging firms.

If you're apt to give your work-age kids an allowance, consider putting them on the payroll instead. This is a great way to give them wages that are tax-deductible to your business, and tax-free to them, up to the $5,350 standard deduction for 2007. (For wages in excess of $5,350, their beginning tax rate is only 10 percent.) And you still get to claim your children as dependents on your personal income tax return. You do need to pay them a legitimate rate for legitimate work, and pay them in the same manner as other employees – on a regular basis by check.

Marketing savings

Although Bernie Buckle has used a variety of media and means to attract work to his shop, Buckle's Collision Center in Portland, Ore., two of the most effective methods have been relatively simple and inexpensive: fliers and a customer referral reward.

"We print on the back of our business cards that we give to our customers that if they refer a friend, they can just write their name on the card, and when the friend brings that card in, we'll send a $25 check for the referral," Buckle said. "We've had some people who are quite proficient at that and make extra money every month."

The radio advertising he tried several years ago was effective – people still come in and mention the ads though they haven't run for years – but didn't generate enough work to justify the cost, he said. He now uses another simple, less expensive marketing tool: fliers inserted in Portland's daily newspaper being delivered to certain zip codes.

"We just rotate which zip codes," Buckle said. "It's not a new idea, but for some reason it's effective for us. In the winter, in particular, we see a lot of people carrying those in."

Other shops have cut marketing costs – or been able to transfer some existing marketing costs to other efforts – by reducing the size of their phone directory ads. Some shops say they have cut their ad in half – or even switched to an in-column ad – with little or no change in the amount of work they get through the directory.

Large expenses = large opportunities

Most people view their lease as a fixed cost, one that can't be changed until the lease renewal. While this is generally the case, the market for commercial property is weak in some areas, and shops in these markets may be able to negotiate down their rent mid-lease.

There also might not seem like much of a way to save on some tool or equipment purchases. But if it's an item you're not likely to use frequently, consider if there's another shop nearby that might be willing to "share" the tool or machine with you.

Payroll is another major expense for collision repair businesses. Some industry consultants recommend that shops provide cost-of-living adjustments when they can, but avoid locking into higher labor costs by using bonuses rather than standardized, periodic merit raises to reward employees.

Employee vacation time can be doubly expensive because you not only pay employees for their time away but also give up the income the employee would generate during that time. If you currently offer more than two weeks of vacation a year for long-term employees, consider reducing that but instead paying for a trip for that employee (and his spouse or family) to use during their vacation time. Do the math and you may find it's cheaper to buy a ski, Disneyland, beach or Las Vegas trip for part of an employee's two-week vacation than it is to have that employee gone for a third or fourth week each year. It also ensures that the employee actually gets some "R&R" on their time off, and it "buys" reinforced support from the family for the employee's continued employment with your shop.

Savings in the office

Check the manual for your laser printer to determine if there's a way to adjust the print density. You can probably lower the density without seeing any difference in the quality of the print, and your toner cartridge may last several months longer than it would otherwise. And consider purchasing recycled toner cartridges.

Fees to process a charge on a customer's debit card are generally half of what they are if that customer uses a credit card. The catch: You need to have the keypad available so the customer can enter their PIN at the time of the transaction. With debit cards now accounting for nearly half of all "card swipe transactions" being processed by retail companies, it can pay to upgrade your processing equipment. Card processing fees vary widely, so comparison shopping of these services is important.

National office supply chains often offer free delivery for businesses, so consider ordering paper and other supplies online rather than spending time away from the shop and burning gas running to the store. Some chains also offer "rewards cards" or regular discounts worth valuable savings.

Start measuring

Often any one or two cost-saving idea won't have a dramatic effect on your shop's bottom line. But regularly looking for and implementing one or two ideas can over time help you reduce your costs as a percentage of your sales.

John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988. He can be contacted by email at jyoswick@SpiritOne.com.

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